While much of the public is aware of a typical financial statement audit, they may not be aware that some organizations who provide benefit plans to their employees also require an audit of the benefit plan’s financial statement. What companies require this type of audit? Why are these audits important? What is the primary objective of an employee benefit plan’s financial statements? The answers to these questions are pretty straightforward.
For companies that provide Employee Benefit Plans (EBPs) for more than 100 individuals, the Employee Retirement Security Act of 1974 (ERISA) requires an EBP audit from an independent party as part of the plan sponsor’s obligation to file a form 5500 with the Department of Labor (DOL). These types of plans can vary, including: 401(k)s, profit-sharing, 403(b)s, stock option plans, pension plans, health and welfare plans, and many others. The primary objective of a plan’s financial statements is simple per the American Institute of Certified Public Accountants (AICPA): to provide information that is useful in assessing the plan’s present and future ability to pay benefits.
The financial reporting process for these plans can involve several different groups. The accounting department, human resources, a Third-Party Administrator (TPA), investment trustees and custodians, an actuary, and, of course, the independent auditor. Some of the tasks of a TPA include, but are not limited to, amending and restating plan documents, preparing employer and employee benefit statements, assisting in processing all types of distributions from the plan, preparing loan paperwork for plan participants, and testing the plan each year to gauge its compliance with all IRS non-discrimination requirements as well as preparing the form 5500. It is particularly important, though, to note that the final responsibility for the financial reporting of the EBP lies with plan management.
A financial statement audit helps protect the integrity of the EBP, which helps users determine whether the necessary funds will be available to pay retirement, health, and other promised benefits to participants. The scope of these audits may vary, however, if the circumstances allow it. For example, a limited scope audit gives the plan administrator the option of not having investment information (at the plan level only) tested during the audit. To permit a limited scope audit, the investment information must be certified by the trustee or custodian as “complete and accurate”. The limited scope exception only applies to investments. In a full scope audit however, everything in the plan is subject to testing.
The responsibility of the independent auditor in this type of engagement is to obtain reasonable assurance that the financial statements as a whole are free from material misstatement, whether caused by fraud or error. Absolute assurance is not attainable and even a meticulously planned and performed audit may not detect a material misstatement. Considering these facts, it is important to keep in mind when selecting an independent auditor whether they have a strong background in EBP audit engagements as well as how much training they undergo each year regarding EBP engagements.
The benefit of an EBP audit is not just the compliance requirements, it is also an investment in the business to protect against any potential fraud or abuse as it protects your assets from internal errors and potential employee deception. If you already have concerns about your plan’s compliance with ERISA and the DOL or would like an outside perspective on your current procedures, please reach out to us at ADKF.